Strategies for superannuation 2006/2007 - MLC · 1 Super is even more super Superannuation is still...

Super LivingStrategies for superannuation

2006/2007

This brochure is published by MLC Limited (ABN 90 000 000 402), 105–153 Miller Street, North Sydney, NSW 2060. It is intendedto provide general information only and does not take into account any particular person's objectives, financial situation or needs.Because of this you should, before acting on any advice in this brochure, consider whether it is appropriate to your objectives,financial situation and needs.

MLC Nominees Pty Limited (ABN 93 002 814 959) is the issuer of MLC MasterKey Superannuation, MLC MasterKey Business Super,The Employee Retirement Plan and MLC Life Cover Super. MLC Investments Ltd (ABN 30 002 641 661) is the Operator ofMLC MasteKey Custom Superannuation and MLC MasterKey Custom Self Managed Super.

You should obtain a Product Disclosure Statement (PDS) relating to any financial products mentioned in this brochure and consider itbefore making any decision about whether to acquire or hold the product. Copies of current disclosure documents are available uponrequest by phoning the MLC MasterKey Service Centre on 132 652 or on our website at mlc.com.au

1

Super is even more superSuperannuation is still one of the best waysto accumulate wealth and save for yourretirement. The main reason, of course,is the favourable tax treatment. When youinvest in super, earnings are taxed at amaximum rate of 15%. A low tax rate meansyour money can grow faster than investmentsthat are taxed at a higher rate.

Depending on your circumstances, there maybe some other great incentives – like claiminga tax deduction for your own contributions orreceiving a co-contribution from theGovernment.

Also, in the 2006 Federal Budget, theGovernment proposed from 1 July 2007,all benefits received from a taxed superfund at age 60 or over will be tax-free.

However, to get the most out ofsuperannuation you need to be ‘super smart’.You need to understand how the rules workand use them to your advantage. You alsohave to keep up with the latest rule changesso you can take appropriate action.

In this booklet, we outline ten clever strategiesthat could help achieve your lifestyle andfinancial goals. Each of these strategies haslong-term implications, so by making the rightmoves now, you may benefit in the future.

This booklet serves as a guide only.To find out if a particular strategy suits yourcircumstances, we recommend you seea financial adviser.

Important information

The strategies covered in this bookletassume that the superannuation fund is acomplying fund (see Glossary).

The information and strategies provided are based on our interpretation of relevantsuperannuation, social security and taxationlaws as at 25 September 2006, as well asthe proposals outlined in the 2006 FederalGovernment Budget and subsequentannouncements.

The Budget proposals have not beenlegislated and the existing laws changefrequently. You should therefore obtain advicespecific to your own personal circumstances,financial needs and investment objectives,before you decide to implement any ofthese strategies.

The investment returns shown in the followingcase studies are hypothetical examples.They do not reflect historical or futurereturns of any specific financial products.

2

Investment basics

This comparison is based on historical performance and is not indicative of future performance. Futureperformance is not guaranteed and is dependent upon economic conditions, investment management and futuretaxation. Source data: Australian shares: S&P/ASX 200 Accumulation Index (All Ordinaries Accumulation Index priorto April 2000), Global shares: MSCI World Gross Accumulation Index ($A), Property: ASX 200 Property AccumulationIndex (Property Trust Accumulation Index prior to July 2000), Australian bonds: UBS Composite Bond Index - Allmaturities (Commonwealth Bank Bond Index prior to November 1987), Cash: UBS Bank Bill Index (RBA 13 WeekTreasury Notes prior to April 1987), Inflation: CPI.

Choosing the right mix of assets can make a big difference toyour super

The graph below reveals growth assets, such as Australian and global shares and property,have delivered higher returns for investors over longer time periods (ie seven years or more).These asset classes have also been more volatile than cash and bonds over the short-term(ie one to three years).

Asset class comparison – $10,000 invested

So …In most cases, you can't access your super until you retire (see FAQs on page 30). So if you don'tplan to retire for another seven years (or more), you may want to consider investing a significantportion of your super in growth assets. But before you make your investment choice, you shouldalso consider your goals, needs, financial situation and your comfort with market ups and downs.

To determine a mix of assets that suits your needs, you should speak to a professionalfinancial adviser.

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$50,000

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Australian Bonds

Cash

Inflation

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Note: Year ended 30 June

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2006

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Contents

Public offer superannuation versus self-managed superannuation 4

Strategies at a glance 7

Strategy 1 Boost savings and minimise tax via salary sacrifice 8

Strategy 2 Divert cashflow from your home loan into super 10

Strategy 3 Combine salary sacrifice with a non-commutable allocated pension 12

Strategy 4 Split your way to a better retirement 14

Strategy 5 Top-up your super with help from the Government 16

Strategy 6 Purchase life and TPD insurance tax-effectively 18

Strategy 7 Move assets into super and minimise tax 20

Strategy 8 Rollover an employer ETP and reduce your tax 22

Strategy 9 Contribute to super and offset CGT 24

Strategy 10 Convert business capital into tax-free retirement benefits 26

FAQs 28

Glossary 32

4

Public offer superannuation

Tips and traps• While you can only invest in the options offered by the fund, a broad choice of investment

options is usually available.

• Because the Trustee makes all the decisions in relation to the management of the fund,

you can sit back and relax while someone else does all the hard work. Keep in mind this

also means you typically have no say in the way the fund is managed.

• Some public offer funds offer reduced management fees for larger account balances.

• Most of the strategies in this book can be implemented through a public offer fund.

In a public offer super fund, a corporate Trustee takes care of all the fund’sreporting, management, tax and investment responsibilities.

A

Public offer funds generally suit people who prefer to outsource the management of their superannuation or have smaller account balances.

S

The benefits• You don’t have to worry about the cost and legal hassle of setting up your own

fund, or the ongoing responsibilities of running the fund.

• You can choose from a range of managed investment options and in some casesdirect shares.

• Your investment receives concessional tax treatment.

5

Self-managed superannuation

Tips and traps• The secret to successfully managing your own super fund is to get expert advice.

Don’t try to do it all yourself.

• As Trustee of your own fund, you and the other Trustees are responsible for all aspects

of the fund – including any tasks outsourced to third-party service providers.

• There are many costs involved in setting up your own fund, including establishment

costs, legal costs, ongoing administration costs and investment costs.

• There are companies who can help you to set up and administer a SMSF.

• Most of the strategies in this book can be implemented through a SMSF.

• There are currently over 317,000* self-managed funds in Australia. To find out whether

a self-managed fund is right for you, talk to your financial adviser.

* APRA Quarterly Superannuation Performance – March 2006.

A self-managed super fund (SMSF) – also known as a DIY fund – has fewer thanfive members. All members are Trustees of the fund, and all the Trustees aremembers. If you set up a SMSF, you take on all the responsibilities of a Trustee.

SMSFs are generally more appropriate for people with larger account balances(upwards of $250,000), who want to be actively involved in the managementof their super.

The benefits• Because you’re a Trustee of the fund, you can exercise more direct control over the

investment strategy.

• You have a choice of managed investments, direct shares and private assets suchas direct property.

• Your investment receives similar concessional tax treatment to a public offer fund.

6

Superannuation is a long-term investment. So it makes sense to invest it in assets that havepotential to provide higher long-term returns.

7

Strategies at a glanceStrategy Suitable for Key benefits Page

Purchase life and TPD insurance tax-effectively

Employees who are eligible to salary sacrifice, employeeswho are eligible to receive co-contributions, couples whereone partner earns a low incomeand self-employed people

• Reduce the cost ofinsurance premiums

• Purchase more insurancecover

Move assets into super and minimise tax

Anyone who wants to transfercertain assets into super(restrictions apply)

• Reduce tax on earnings

• Increase super benefits

Rollover an employer ETP and reduce your tax

Anyone receiving an employer ETP

• Pay less tax on your benefit


Contribute to super and offset CGT

Anyone selling an investmentwho is eligible to make tax-deductible contributionsinto superannuation

• Save CGT


Convert business capital into tax-free retirement benefits

Small business ownersapproaching retirement

• Save CGT


Boost savings and minimisetax via salary sacrifice

Employees and employers • Reduce income tax


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Top-up your super with helpfrom the Government

Lower income employees • Receive a Government co-contribution (up to $1,500)


Divert cashflow from yourhome loan into super

Anyone with a home loan • Use your cashflow tax-effectively


Combine salary sacrificewith a non-commutableallocated pension

Anyone aged 55 or older andstill working

• Increase your retirementsavings

• Benefit from an income stream investment whileyou are still working

Split your way to a betterretirement

Couples • Reduce tax on super benefitsreceived before age 60

• Retain more of your super

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8

It's a well-documented fact – we all need totake responsibility for funding our retirement.So if you are looking for a simple and tax-effective way to boost your retirementsavings, you may want to consider a strategyknown as salary sacrifice.

Salary sacrifice involves getting your employer to contribute some of your salary, wages or abonus payment directly into super – before taxis deducted at your marginal rate (which couldbe up to 46.5%*). The advantage of this is salarysacrifice super contributions are taxed at amaximum rate of 15% – a potential tax savingof up to 31.5%.

By implementing this strategy you can saveon tax and make a larger investment for yourretirement.

* Includes a Medicare Levy of 1.5%.

How does the strategy work?To use this strategy you will need to make an arrangement with your employer that isprospective in nature. In other words, you canonly sacrifice income that relates to futureperformance. When sacrificing regular salary orwages, the arrangement should commence onthe first day to which the next pay period relates.

However, you may only salary sacrifice a bonuspayment to which you have no pre-existingentitlement. In practice, this means thearrangement must be made no later than theday before your employer determines yourbonus entitlement.

In both cases, it's also important to have theagreement thoroughly documented and signedby both parties.Note: Salary sacrifice contributions can’t be accesseduntil you meet a condition of release – see FAQs onpage 30.

Strategy#

01 The benefits• Increase your retirement savings in a tax-effective manner.

• Invest up to 85% of your pre-tax salary, compared to only 53.5%* when investing

take home pay.

* Assumes you pay tax at the highest marginal rate of 46.5% (including a Medicare Levy of 1.5%).

Boost savings and minimise taxvia salary sacrifice

9

Tips and traps• A salary sacrifice arrangement may

result in a reduction in other benefits

such as leave loading, holiday pay and

Superannuation Guarantee contributions,

as these benefits are often calculated

on your base salary.

• It may be worthwhile converting

your home loan to interest-only and

contributing pre-tax salary into super via

salary sacrifice (see Strategy 2).

• If you are aged 55 or over and still

working, you may want to sacrifice a

portion of your pre-tax salary into super

and commence a non-commutable

allocated pension to replace your income

shortfall (see Strategy 3).

• If eligible, there may be an advantage

in splitting some of your salary sacrifice

(or other super) contributions with your

spouse (see Strategy 4).

• If you’re an employee (and your assessable

income plus reportable fringe benefits is

less than $58,000 pa.) you may want to

consider making a personal after-tax super

contribution of $1,000. This may enable

you to qualify for a Government

co-contribution of up to $1,500

(see Strategy 5).

• Before agreeing to a salary-packaging

request, employers should ensure the

amount to be sacrificed, plus the

employee's Superannuation Guarantee

or employer discretionary contributions,

does not exceed the relevant age-based

Maximum Deductible Contribution limit

in 2006/07 (see FAQs on page 28).

• Although it is possible to sacrifice salary

below the minimum entitlement under

an industrial award, employers should

be aware they may still be required to

provide the minimum salary or wages

under industrial law.

Case study William (aged 45) receives a salary of $75,000 pa and anticipates receiving a bonus of around$10,000. He negotiates with his employer to have any bonus paid directly into his super fund,rather than receiving the money as cash salary. This will enable him to invest an additional $2,650.

Bonus as after-tax Bonus as salary salary sacrifice

Pre-tax bonus $10,000 $10,000

Less income tax at 41.5%* ($4,150) (N/A)

Less contributions tax at 15% (N/A) ($1,500)

Net amount to invest $5,850 $8,500

Additional amount to invest $2,650

If William retires in 20 years at age 65, the higher initial investment, plus a maximum tax rate of15% on investment earnings, makes salary sacrifice a more powerful strategy than investing theafter-tax bonus within super (as an undeducted contribution) or outside super. This is confirmedbelow at William’s marginal tax rate of 41.5%*, as well as the highest marginal rate of 46.5%*.


Assumptions: A 20-year comparison based on a $10,000 pre-tax bonus payment. Total return is 8% pa(split 3% income and 5% growth). The overall franking level on investment income is 25%. All figures are afterincome tax (at 15% on super and 41.5% or 46.5% on non-super), capital gains tax (including discounting) andlump sum tax (does not include the low-tax threshold). These rates are assumed to remain constant over theinvestment period.

What about tax-free benefits for the over 60s?The Government has proposed from 1 July 2007, all benefits received from a taxed super fund(see Glossary) at age 60 or over will be tax-free. If this proposal is legislated, the salary sacrificeresult would increase to $37,293 for marginal tax rates of 46.5% and 41.5%. Also, the super(undeducted) results will increase to $23,472 and $25,666 for marginal tax rates of 46.5% and41.5%, respectively. This is because, in 20 years, William will be over age 60 when he accesseshis super and will not need to pay lump sum tax on his benefit.

The long-term benefits of salary sacrifice ($10,000 invested over 20 years)

$31,139

Salary sacrifice

Marginal tax rate:

Super (undeducted) Non-super

$31,139

0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

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Divert cashflow from your home loan into superMany people opt for a home loan thatrequires principal and interest (P&I) repayments.However, if you want to maximise yourretirement savings, you may be better offswitching your home loan to interest-only andcontributing pre-tax salary into super viasalary sacrifice (see Strategy 1).

How does the strategy work?To use this strategy, you need to refinanceyour home loan. Most lending institutions offerinterest-only loans with a choice of fixed andvariable interest rates.

By not making principal repayments, yoursurplus cashflow* will increase, giving you theopportunity to sacrifice an equivalent amountof pre-tax salary into your super fund.

Because your debt will remain the same,you’ll pay more interest over the life of theloan. You’ll also need to repay the loan, in full,at a later date (eg by cashing out some ofyour super when you meet a condition ofrelease – see FAQs on page 30).

You still have the potential to come out aheadas salary sacrifice contributions are madefrom your pre-tax salary and are taxed at amaximum rate of 15%. Conversely, home loanprincipal repayments are made from yourafter-tax salary (ie after tax is deducted atyour marginal rate of up to 46.5%#).

While results will depend on factors such asyour marginal tax rate, home loan interest rate,investment returns and your time horizon,diverting cashflow from your home loan tosuper can be a powerful strategy.

* In this context, surplus cashflow is your after-taxincome from all sources, less your living expenses and home loan repayments.

# Includes a Medicare Levy of 1.5%.

Strategy#

02 The benefits• Use your cashflow more tax-effectively, by investing pre-tax money in super rather than

making home loan repayments from your after-tax salary.

• Build more wealth to support yourself in retirement.

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Case studyRodney, aged 50, pays tax at a marginal rate of 41.5%*. His home loan is $250,000 and thecurrent interest rate is 7.5% pa He is making the minimum P&I repayment of $2,968 per monthover a ten-year term. He is looking to build his retirement savings, but currently doesn’t haveany surplus cashflow to do this.

If he switches to an interest-only loan at an interest rate of 7.5%, his repayment will reduceto $1,563 per month. This will free-up $1,405 in cashflow each month and enable him to investa pre-tax amount of $2,402# per month in super via salary sacrifice.

Per month

P&I repayment $2,968

Less interest-only repayment ($1,563)

Surplus cashflow created by refinancing $1,405

Pre-tax amount available to salary sacrifice $2,402#

The next table shows the value added by this strategy in ten years, after cashing out his super, paying lump sum tax and repaying the debt of $250,000. By using his cashflow more tax-effectively, he has accumulated an additional $51,703 in super for his retirement,despite paying more home loan interest.

In ten years

Value of salary sacrifice contributions (including earnings) $361,321

Less lump sum tax at 16.5%* ($59,618)

Less amount withdrawn from super to repay home loan ($250,000)

Net value of salary sacrifice contributions (including earnings) $51,703


# The salary sacrifice amount of $2,402 per month, less tax at his marginal rate of 41.5% (ie $997) is the pre-tax equivalent of his surplus cashflow of $1,405 per month.

Assumptions: A ten-year comparison. The salary sacrifice super contributions earn a total return of 8% pa(split 3% income and 5% growth). The overall franking level on investment income is 25%. The home loaninterest rate is 7.5%. All figures are after income tax of 15% on super, capital gains tax (including discounting),lump sum tax (does not include the low-tax threshold), home loan interest and repayment of the home loan.These rates are assumed to remain constant over the investment period.

What about tax-free benefits for the over 60s?

The Government has proposed from 1 July 2007, all benefits received from a taxed super fund (see Glossary) at age 60 or over will be tax-free. If this proposal is legislated, the value added by this strategy will increase to $111,321. This is because, in ten years, Rodney willbe aged 60 when he accesses his super and will not need to pay lump sum tax on his benefit.

Tips and traps• Some lending institutions may charge

fees when you refinance your home

loan to interest-only.

• Salary sacrifice super contributions

can’t be accessed until you meet a

condition of release – see FAQs on

page 30.

• Salary sacrifice (and other employer

super) contributions cannot exceed

certain limits – see FAQs on page 28.

• There may be an advantage in splitting

some of your salary sacrifice (or other

super) contributions with your spouse

(see Strategy 4).

• If you have surplus cashflow before you

refinance to an interest only loan, you

could use this to make additional

principal repayments, or contribute an

equivalent pre-tax amount into super

via salary sacrifice. To find out the best

option for you, seek financial advice.

• There is a legislative risk that a future

Government may restrict lump sum

withdrawals from a super fund. This

could limit your ability to pay off the

loan, unless you have other savings.

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Combine salary sacrifice with anon-commutable allocated pension

In Strategy 1, we explained why you mightwant to make salary sacrifice contributions intosuper. If you are 55 years of age or older andstill working, you could consider combiningsalary sacrifice with a non-commutableallocated pension (NCAP). By using thisstrategy, you may be able to build a biggerretirement nest egg without compromisingyour current lifestyle.

How does the strategy work?This strategy involves:

• Arranging with your employer to sacrificepart of your prospective pre-tax salarydirectly into a super fund

• Investing some of your existing super in aNCAP, and

• Using the regular payments from the NCAP to replace the income you sacrificeinto super.

By taking these steps, it’s possible to accumulatemore funds for your retirement. This is due toa range of potential advantages, including:

• Less tax on contributions, as salary sacrificesuper contributions are taxed at up to 15%,rather than marginal rates of up to 46.5%*

• Less tax on income, as part of the incomepayments from the NCAP may be tax-exempt and the taxable portion willattract a tax offset of up to 15%

• Less tax on earnings, as investmentearnings in a NCAP are only taxed whenreceived as part of the income payments.

While any income stream that meets certaincommutation restrictions can be used whenimplementing this strategy, a NCAP offers anumber of distinct advantages.

For example, you can take a cash lump sumonce you meet another condition of release(see FAQs on page 30). You can also choosean income within legislated minimum andmaximum limits. This level of flexibility isgenerally not available with a complyingincome stream (eg a non-commutable termallocated pension).* Includes a Medicare Levy of 1.5%.

Note: The Australian Taxation Office (ATO) hasconfirmed straightforward arrangements involving a NCAP and salary sacrifice should not result inadverse tax consequences and penalties under thegeneral anti-avoidance provisions. However, if thestrategy is artificial or contrived, it is likely to attractATO attention.

Strategy#

03 The benefits• Build more wealth to support yourself when you permanently retire.

• Take advantage of a tax-effective income stream while you are still working.

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Case studyCraig (aged 55), earns a pre-tax salary of $90,000 pa and receives 9% Superannuation Guarantee(SG) contributions. He decides to reduce his pre-tax salary to $55,000 pa and sacrifices $35,000 painto his super fund. To receive the same after-tax income he commences a NCAP and elects toreceive taxable income payments of $27,313 in the first year.Note: We have assumed Craig continues to receive 9% SG based on his package of $90,000 pa., even after hesacrifices $35,000 pa into his super fund.

Before strategy After strategy

Pre-tax salary $90,000 $55,000

NCAP income Nil $27,313

Total pre-tax income $90,000 $82,313

Less tax payable* ($25,200) ($17,513)

After-tax income $64,800 $64,800

SG contributions $8,100 $8,100

Salary sacrifice contributions Nil $35,000

* Takes into account the Mature Age Worker Tax Offset. Where the NCAP is used, we have assumed Craig iswithin his Reasonable Benefit Limit (RBL – see FAQs on page 31) and is therefore entitled to the full 15%pension offset. We have also assumed Craig is not entitled to a tax-exempt deductible amount (see Glossary).

While the after-tax income and SG contributions are exactly the same in both scenarios,this strategy has the potential to increase Craig’s retirement savings.

This is partly because Craig will invest more money in super each year than he will withdraw fromhis NCAP. For example, in the first year, while Craig will receive an income of $27,313 from theNCAP, he will invest a net amount of $29,750 in his super fund (ie $35,000 less 15% contributionstax = $29,750). That’s an extra $2,437 in the first twelve months alone. Also, money invested inthe NCAP is only subject to tax when received as income, versus tax at up to 15% applying toearnings accumulating in the accrual phase in super.

If we assume Craig has $325,000 in super (consisting entirely of the post-June 1983 component)and invests this amount in a NCAP, the next table shows the value added by this strategy overvarious time periods.

After year… Value of investments Value added by Before strategy After strategy strategy

(super only) (super and NCAP)

1 $358,036 $362,351 $4,315

5 $518,640 $543,882 $25,242

10 $802,583 $864,666 $62,083

* Other assumptions: Both the super and NCAP investment earn a total pre-tax return of 8% pa (split 3%income and 5% growth). The overall franking level on investment income is 25%. Salary doesn’t change overthe ten-year period. Neither the super nor NCAP investment are cashed out.

Tips and traps• When using this strategy, there are

some limitations that need to be

considered. For example:

– To replace a high level of salary

(when sacrificed into super), you

may need to invest a large amount

in a NCAP.

– The salary sacrifice (and other

employer super) contributions

cannot exceed certain limits

(see FAQs on page 28.)

– If your SG contributions are based

on your reduced salary amount, this

strategy could erode your wealth.

• Certain access restrictions apply when

investing super in a NCAP (or other

non-commutable income stream – see

your adviser for more details).

• There may be an advantage in splitting

some of your salary sacrifice (or other

super) contributions with your spouse

(see Strategy 4).

• A NCIS could also be used to top-up

your salary when reducing your

working hours.

What about tax-free benefitsfor the over 60s?The Government has proposed from 1 July 2007, no tax will be payable atage 60 or over on income streaminvestments paid from a taxed superfund (see Glossary). If this proposal islegislated, the value added by thisstrategy after 10 years will increase to$94,284. This is because, betweenyears five and ten, Craig will be overage 60 and will therefore receive tax-free income payments from the NCAP.

14

Split your way to a betterretirement

If you have a spouse, you may want to splitsome of the super contributions you receiveafter 31 December 2005 into their account.By using this strategy, you could receive your combined super balances in a more tax-effective manner prior to age 60.

For example, by accumulating super in twonames, splitting contributions could enableyou to:

• Gain access to two low-tax thresholds(of $135,590 in 2006/07) when makinga lump sum withdrawal from the post-June1983 component (see case study).

• Commence two retirement income streams(such as an allocated pension) and takeadvantage of two sets of personal taxthresholds, as well as pension offsets ofup to 15% on the taxable income payments.

How does the strategy work?As a general rule, you need to apply to thesuper fund after the end of each financial yearif you want to split the contributions youreceive in the previous financial year*.

However, if you close your account to commencean income stream or rollover the proceeds toanother super provider, some funds may allowyou to split the contributions you receive duringthe financial year up until the point of rollover.

The maximum amount you can split is:

• Up to 85% of your taxable contributionsie all employer contributions (includingsalary sacrifice – see Strategy 1) andpersonal deductible contributions.

• Up to 100% of your untaxed contributions,ie personal undeducted contributions,Government co-contributions (see Strategy 5)and spouse contributions (see FAQs onpage 29).

To use this strategy, you and your spouse mustbe in a married (or de facto) relationship, butyou can’t be same sex partners. Also, to receivea contribution split, your spouse must be under55 years of age or, if between 55 and 64 years,they must meet certain conditions (see FAQson page 29).

* For the financial year ending 30 June 2006, onlycontributions received between 1 January 2006and 30 June 2006 can be split.

Strategy#

04 The benefits• Reduce tax on super benefits received before age 60.

• Retain more of your super to meet your needs in retirement.

15

Case studyHarry (aged 48) is married to Ruth (aged 46). They plan to access their super in ten years(ie before either of them reaches age 60). Harry currently has $200,000 in super, consistingentirely of the post-June 1983 component and Ruth has not received any super contributions.

Because Harry’s super already exceeds the tax-free threshold on the post-June 1983 componentof $135,590 in 2006/07, any additional employer contributions (and future investment earnings)will be taxed at 16.5%* if received by him as a lump sum between age 55 and 59.

To reduce the amount of tax payable, Harry instead arranges to split 85% of his employer’scontributions with Ruth over the next ten years. As a result, she accumulates $100,000 in super.Because her account balance is well within the tax-free threshold, Ruth will not have to pay lumpsum tax of 16.5%* on her benefit – a tax saving to the couple of $16,500.

If retained by Harry If received by Ruth

Split amount (including earnings) $100,000 $100,000

Lump sum tax rate payable 16.5%* Nil

Lump sum tax payable $16,500 Nil


Given the tax-free threshold is indexed each year, there is considerable scope for Ruth toaccumulate additional tax-free benefits. This could be achieved, for example, if Harry makes salarysacrifice contributions into his super fund and splits up to 85% of these into Ruth’s super account.


If you plan to receive benefits from a taxed super fund (see Glossary) at age 60 or over after1 July 2007, splitting is unlikely to provide any tax advantages. This is because the Governmenthas proposed you won’t have to pay any tax on your super benefits.

However, if this proposal is legislated, there may be some other reasons for using a splittingstrategy. These include to:

• Transfer contributions to an older spouse, who will reach age 60 earlier and will be ableto receive tax-free benefits upon reaching this age.

• Provide some protection against the legislative risk that a future Government will re-introducesome form of taxation on end super benefits for people aged 60 or over.

Tips and traps• Not all funds offer splitting and some are

not eligible to participate (eg the defined

benefit component of any super interest

is excluded).

• Funds offering splitting are likely to have

their own rules and limits. For example,

some funds may limit the split to ensure

a minimum account balance remains.

• Certain amounts can’t be split.

For instance, once contributions have

been rolled over to another fund, they

cannot be re-directed to your spouse.

• Before you split super contributions,

you should determine whether the

potential benefits outweigh the costs

(including any splitting fees or capital

gains tax that may be payable).

• After splitting super contributions,

there may be tax or estate planning

advantages if you (or your spouse)

cash-out and re-contribute a portion

of your super benefits before

commencing an income stream.

• Rather than making undeducted

contributions and splitting them

with your spouse, it may be easier

(and possibly more tax-effective) for

contributions to be made directly to

your spouse’s account. For example,

if your spouse makes their own

undeducted contributions, they may

qualify for a co-contribution of up to

$1,500 (see Strategy 5).

16

Strategy#

05 The benefits• Receive a co-contribution from the Government of up to $1,500 pa.

• Increase your retirement savings in a tax-effective manner.

Top-up your super with help from the GovernmentIf you are a lower income employee you maywant to make personal after-tax (undeducted)contributions to a super fund. By implementingthis strategy, you can boost your retirementsavings and possibly receive a Government co-contribution of up to $1,500 each year.

Another benefit is that your own contributions(as well as any associated co-contributions)aren’t taxed on entering the super fund andcan be received tax-free in retirement – either as a lump sum or as part of the regularpayments from an income stream investment.

Also, investment earnings in a super fund aretaxed at a maximum rate of 15%, which is likelyto be lower than the marginal tax rate you paywhen investing outside super.

How does the strategy work?To qualify* for the full co-contribution ($1,500)you generally need to make a personal after-taxsuper contribution of $1,000 and earn# lessthan $28,000 pa. However, a reduced amountmay be paid if you contribute less than $1,000and/or your earn# between $28,000 paand $58,000 pa.

The Australian Taxation Office (ATO) willdetermine if you qualify based on the datareceived from your super fund (usually by 31 October each year for the preceding financialyear) and the information contained in your tax return. As a result, there can be a time lagbetween when you make your personal after-tax contribution and when theGovernment pays the co-contribution.

If you are eligible for the co-contribution,you can nominate which fund you would liketo receive the payment. Alternatively, if you don’tmake a nomination and you have more thanone account, the ATO will pay the money intoone of your funds based on set criteria.

* Other eligibility conditions apply (see FAQs on page 29).

# Includes assessable income plus reportablefringe benefits.

Note: Some funds or superannuation interests may not be able to receive co-contributions. This includes unfundedpublic sector schemes, defined benefit interests, traditionalpolicies (such as endowment or whole of life) andinsurance only superannuation interests.

17

Tips and traps• Personal after-tax contributions (as well

as any associated co-contributions) can’t

be accessed until you meet a condition

of release – see FAQs on page 30).

• Make sure you supply your super fund

with your Tax File Number so that the

ATO can correctly determine your

entitlement to a co-contribution.

• If you are a higher income earner and

you are currently making salary sacrifice

contributions (see Strategy 1), your lower

income spouse (if applicable) may also

want to make an after-tax contribution

so they can qualify for a co-contribution.

If you have insufficient cash flow to do

both, there may be an advantage if you

forgo a portion of your salary sacrifice

contributions and have your spouse

invest the after-tax proceeds into their

super account instead.

• If you want to maximise your eligibility for

a co-contribution, salary sacrificing into

super could enable you to reduce your

income below $58,000 pa (so that you

qualify for a part co-contribution) or

$28,000 pa (to qualify for a

full co-contribution).

• A co-contribution could be used to

purchase insurance through a super fund

(see Strategy 6). Alternatively, insurance

purchased through a super fund may

attract a co-contribution that could be

used to top-up your super investments or

purchase even more insurance cover.

• You could also consider making an

after-tax contribution of $3,000 into

a super fund on behalf of your spouse.

If they earn less than $13,800 pa., this

may entitle you to a spouse offset of up

to $540 (see FAQs on page 29).

Case study

Ryan (aged 40) is employed and earns $36,000* pa He wants to invest $1,000 per year (from his after-tax salary) so he can build his retirement savings.

If he invests the $1,000 outside super each year (in a unit trust, for example), the earnings will be taxable at his marginal rate of 31.5%#. If he invests the money in super as a personalafter-tax contribution, the earnings will only be taxed at a maximum rate of 15%, and he will beentitled to a co-contribution of $1,100 per year.

The graph below compares these two approaches if they are maintained over 20 years untilRyan is age 60. The combined effect of receiving co-contributions and the lower tax rate oninvestment earnings will make a big difference to his wealth in retirement.

* Includes assessable income plus reportable fringe benefits.# Includes a Medicare Levy of 1.5%.

Assumptions: A 20-year comparison based on an after-tax investment of $1,000 pa. The super investment (only)attracts a co-contribution of $1,100 pa. Total return is 8% pa (split 3% income and 5% growth). The overallfranking level on investment income is 25%. All figures are after income tax (at 15% for super and 31.5% fornon-super), capital gains tax (including discounting) and lump sum tax (does not include the low-tax threshold).These rates are assumed to remain constant over the investment period.


The Government has proposed from 1 July 2007, all benefits received from a taxed super fund(see Glossary) at age 60 or over will be tax-free. If this proposal is legislated, the result in thegraph above for investing in super will increase to $94,270. This is because, in 20 years, Ryanwill be aged 60 when he accesses his super and will not need to pay lump sum tax on his benefit.

$85, 646

$41,870

Invested in super(Includes co-contribution

of $1,100 pa)

Invested outside super

The long-term benefits of co-contributions($1,000 pa in after-tax salary invested over 20 years)

$0

$20,000

$40,000

$60,000

$80,000

$100,000

18

Purchase life and TPD insurancetax-effectivelyMany people take out insurance via a personalpolicy in their own name. However, if you’reable to make salary sacrifice contributions,you’re eligible for a Government co-contribution,you have a low-income spouse or you’re self-employed, you should consider thebenefits of insuring through a super fund.

By holding life and total and permanentdisability (TPD) insurance through super, youmay be able to reduce the effective cost ofyour premiums – in some cases by up to46.5%*. When you take into account thepotential tax savings, it’s also possible topurchase a higher level of cover, whencompared to insuring outside super.


How does the strategy work?The same tax deductions and offsets thatapply when investing in super also apply toinsurance purchased through a super fund.

• If you’re eligible to make salarysacrifice contributions (see Strategy 1),you may be able to purchase insurancethrough a super fund with pre-tax dollars.

• If you’re employed, earn less than$58,000# pa and make personal after-tax(undeducted) super contributions,you may be eligible to receive a Governmentco-contribution (see Strategy 5) that couldhelp you cover the cost of insurance.

• If you make super contributions onbehalf of a low-income spouse, you maybe able to claim a tax offset of up to$540 pa (see FAQs on page 29) that couldbe put towards insurance premiums foryou or your spouse.

• If you’re self-employed in the 2006/07financial year you can generally claim thebulk of your super contributions as a taxdeduction (up to your age-based MaximumDeductible Contribution limit – see FAQson page 28), regardless of whether thecontributions are used by the super fundto purchase super investments orinsurance.

These tax outcomes can make it significantlycheaper to insure through a super fund.All you need to do is nominate how yourcontributions should be allocated between yoursuper investments and your insurance policy.

# Includes assessable income plus reportablefringe benefits.

Strategy#

06 The benefits• Reduce the cost of your life and TPD insurance premiums.

• Purchase a higher level of cover when compared to insuring outside super.

19

Tips and traps• Insurance cover, purchased through

a super fund is owned by the Trustee of

the super fund who is responsible for

paying benefits subject to relevant

legislation and the rules of the fund.

When considering insurance cover

purchased through a super fund you

should be clear on the powers and

obligations of the relevant Trustee

in respect of paying benefits.

• If your spouse is unable to make salary

sacrifice contributions in their own right

(see Strategy 1) and they have a marginal

tax rate greater than 15%, you may want

to split some of your taxable super

contributions into their account (see

Strategy 4). This could enable your

spouse to purchase insurance in their

super fund tax-effectively.

• You may also be able to purchase

income protection (temporary disability)

insurance within a super fund 5767. This

could enable you to cover up to 75% of

your income if you are unable to work

due to illness or injury.

Case study

Andrew (aged 38) earns a salary of $80,000 pa. He is married with young children and hasa large mortgage.

His employer’s super fund already provides life and TPD insurance. He needs additional cover tohelp his family pay off their debts and replace his income, should the unthinkable happen. Thepremium for this additional insurance is $1,170 pa.

If he takes out the additional cover through a personal insurance policy (outside super), he willneed to pay the annual premium from his after-tax salary. The pre-tax cost will therefore be $2,000(ie $2,000 less tax at his marginal rate of 41.5%* is $1,170).

After speaking to his adviser, Andrew decides to take out an equivalent level of cover through hissuper fund. He arranges for his employer to sacrifice $1,170 of his pre-tax salary into his fundand instructs the fund administrator to use this contribution to pay for the insurance premiums.

Because super funds receive a tax deduction for death and disability premiums, no contributionstax will be deducted from Andrew’s super contribution. As a result, he will be able to purchase theinsurance through his super fund with pre-tax dollars and make a pre-tax saving

#of $830 on the

first year’s premiums.

Insurance purchased Insurance purchased outside super within super

(with after-tax salary) (via salary sacrifice)

Insurance premium (pa..) $1,170 $1,170

Plus income tax payable on salary at 41.5%* $830 Nil

Pre-tax cost of insurance $2,000 $1,170

Pr-tax saving# $830


# Given Andrew pays tax at a marginal rate of 41.5%, the after-tax saving would be $485.

What about the Federal Budget proposals?

In the 2006/07 financial year, when death benefits (including insurance) are paid as a lump sumfrom a taxed super fund (see Glossary):

• No tax is payable by your dependants on amounts up to your unused Pension ReasonableBenefit Limit (RBL – see FAQs on page 31)

• Tax of up to 46.5%* is payable by any beneficiary on amounts exceeding your unusedPension RBL.

The Government has proposed from 1 July 2007, all lump sum death benefits from a taxedsuper fund will be tax-free when received by a dependant. If this proposal is legislated, it willprovide additional incentive to take out insurance through super.

20

Move assets into super and minimise taxThere are a number of good reasons for settingup your own self-managed super fund (SMSF)or investing via a public offer discretionarymaster trust (see Glossary). You have a broadchoice of managed and direct investments andcan decide when assets are bought and sold.

Another key benefit is you can usually transferthe ownership of certain assets directly intoyour fund. By making what is known as an ‘in specie ’ super contribution, you can takeadvantage of the low tax rate on investmentearnings and make your retirement savingswork harder.

How does the strategy work?If you own an asset outside super, youpay tax on the investment earnings at yourmarginal rate (which could be as highas 46.5%*). However, if you transfer theownership of certain assets into super, theinvestment earnings will only be taxed at amaximum rate of 15% – a tax saving of up to 31.5% pa.

Admittedly, the change in ownership of theasset may mean that capital gains tax (CGT) ispayable. Nevertheless, the long-term benefitsof a lower tax rate on investment earningsmay more than compensate for any potentialCGT liability.

You may also be able to minimise your CGT liability if you have any accumulatedcapital losses or you’re eligible to claim yoursuper contributions as a tax-deduction(see Strategy 9).


Note: In specie (and other super) contributions can’tbe accessed until you meet a condition of release –see FAQs on page 30. If you don’t need to access themoney until you retire, this shouldn’t be an issue,provided you have sufficient cash outside super tocover any unexpected expenses or emergencies.

Strategy#

07 The benefits• Reduce tax payable on investment earnings.

• Increase the after-tax benefit available for retirement significantly.

21

Case study

Kate (aged 40) owns shares she bought several years ago for $25,000. They’re currently worth$50,000 and she plans to use them to fund her retirement. After speaking to her adviser, shedecides to contribute the shares in specie into her self-managed super fund to take advantageof the lower tax rate on investment earnings.

By transferring ownership of the shares, she’ll need to pay $5,188 in CGT*. Assuming she sellssome of the shares to cover her CGT liability, Kate will be able to invest a net amount of $44,812in her super fund, as a personal after-tax (undeducted) super contribution.

The following graph compares the results after 20 years of making an in specie contribution with keeping the shares in her own name.

* Assumes Kate pays tax at a marginal rate of 41.5% (including a Medicare Levy of 1.5%) and is unable to claim her super contribution as a tax-deduction. She also adopts the 50% CGT discount method whenworking out her taxable capital gain and has no capital losses.

Assumptions: A 20-year comparison. Total return is 8.5% pa (split 3% income and 5.5% growth). All dividendsare re-invested. All dividend income assumes a franking level of 75%. All figures are after income tax (at 41.5%for non-super and 15% for super). These rates are assumed to remain constant over the investment period.

By transferring her shares into super, Kate will have approximately $23,000 more for retirement(before CGT). Also, if she uses this money to commence a tax-effective income stream withinher SMSF (eg an allocated pension), no CGT will be payable. Under the current rules, any assetssold during the pension phase of a super fund are not taxable.

Conversely, if she had stuck with her original strategy (ie kept the shares in her own name),CGT would have been payable if she needed to sell her shares to meet her lifestyle needsin retirement.

Tips and traps• Under superannuation law, only certain

types of assets can be acquired by a fund

from a member or relative. This includes

shares held in your own name (that are

listed on an approved stock exchange),

business real property (see Glossary),

and widely held unit trusts. The ability to

acquire an asset from a member will also

be subject to the particular rules of the

super fund.

• If you are considering a SMSF, you

should be aware there are strict

membership and Trustee rules (including

the requirement that all members of the

fund are Trustees). As a Trustee, you

are responsible for the general running

of the fund, as well as compliance with

the trust deed and superannuation law.

• If you want greater investment flexibility

without the burden of running your own

fund, a public offer discretionary master

trust may be a more viable alternative.

These funds offer you an extensive

range of investments and usually allow

you to make in specie contributions.

• Stamp Duty may be payable on the

in specie transfer in some States

and Territories.

• With some assets (like shares and

managed investments) it may be simpler

to sell the asset, contribute the proceeds

into super and re-purchase the same

asset in your super fund.

$253,219

$229,966

Shares held in super Shares held in own name

The long-term benefit of holding assets in super after 20 years(Before CGT on end benefits)

$0

$100,000

$200,000

$300,000

22

Rollover an employer ETP andreduce your taxOn leaving your employer, you may be entitledto an Eligible Termination Payment (ETP) thatcan be taken as cash or rolled over to a superfund in the 2006/07 financial year. Examplescan include the taxable component of aredundancy payment and an ex-gratia payment,such as a golden handshake (see Glossary).

For some people, cashing out some (or all)of an employer ETP could be a sensible strategy.Particularly if you have non tax-deductible debts(eg a mortgage), you need extra cash to meetyour living expenses or you need to retainaccess to the money*.

If you want to pay less tax and maximise yourretirement savings, rolling over an employerETP could be a smarter alternative.

* Employer ETPs rolled over to a super or rollover fundafter 1 July 2004 generally cannot be accessed untilyou meet a condition of release (see FAQs on page 30).

How does the strategy work?Tax is usually payable on an employer ETP,regardless of how you receive the payment.However, as a general rule, the initial tax billwill be less if you elect to rollover the money.

Also, once the payment is invested in a superfund, earnings are taxed at a maximum rateof 15%. If cashed out, earnings from non-superinvestments are taxed at your marginal rate(which could be as high as 46.5%#).

The table below summarises the tax rules thatapply in the 2006/07 financial year, assumingyour payment falls within your ‘ReasonableBenefit Limit’ (see FAQs on page 31).

Strategy#

08 The benefits• Pay less tax when you receive your benefit.

• Take advantage of a maximum tax rate of 15% on investment earnings.

• Build more wealth to support yourself in retirement.

If you cash-out If you rollover

Initial tax on pre-July 1983 component 5% included in your Nilassessable income and taxable at your marginal rate

Initial tax on post-June 1983 component• If under 55 • 31.5%# • 15%• If 55 or over • First $135,590 taxed • 15%

at 16.5%# and the resttaxed at 31.5%#

Tax on investment earnings Up to 46.5%# Up to 15%

# Includes a Medicare Levy of 1.5%.

23

Case study

Brendan (aged 40) has been with his employer for ten years and is about to change jobs.He has earned a salary of $90,000 this financial year and anticipates receiving an employerETP of $60,000 on termination of employment. After tax is taken into account, rolling over hispayment to a super fund will enable Brendan to invest an additional $9,900.

Cash-out ETP Rollover ETP

Employer ETP $60,000 $60,000

Less lump sum tax at 31.5% ($18,900) (N/A)

Less contributions tax at 15% (N/A) ($9,000)

Net amount to invest $41,100 $51,000

Additional amount to invest $9,900

Let’s now assume Brendan retires in 20 years. The maximum tax rate of 15% on investmentearnings in super has made a big difference, with the super investment worth over $44,000more than the non-super alternative.

Assumptions: A 20 year comparison. Total return is 8% pa (split 3% income and 5% growth). All income is re-invested. The overall franking level on investment income is 25%. All figures are after income tax (at 41.5%for non-super and 15% for super), capital gains tax (including discounting) and lump sum tax on withdrawal fromthe super fund at age 60 (does not include the low-tax threshold). These rates are assumed to remain constantover the investment period.


The Government has proposed from 1 July 2007, all benefits received from a taxed super fund(see Glossary) at age 60 or over will be tax-free. If this proposal is legislated, the result fromrolling over to super would increase to $223,755. This is because, in 20 years, Brendan willbe aged 60 when he accesses his super and will not need to pay lump sum tax on his benefit.

Tips and traps• On leaving your employer, you may be

entitled to a range of payments that must

be taken as cash (eg your final pay,

annual leave, long-service leave and the

tax-free component of a redundancy

payment). These payments should

generally be used up first if you need

cash to cover your living expenses or

pay-off non tax-deductible debts.

• If your position has been made

redundant, you should keep in mind

that rolling over your employer ETP may

help you to maximise your entitlement

to social security benefits, such as the

Newstart Allowance.

• If you rollover your employer ETP

(and your super fund has a pre-July

1983 service period) the valuable

pre-July 1983 component will be

applied to your employer ETP in

2006/07. As a result, only 5% of the

pre-July 1983 component will be taxed

at your marginal rate if the benefit is

later cashed out.

• It may be more tax-effective if you rollover

an employer ETP and defer receiving a

benefit until after 1 July 2007, when the

Government has proposed that RBLs will

be abolished and all benefits received

from a taxed super fund (see Glossary)

will be tax-free when received by people

aged 60 or over.

• Unless you qualify for certain transitional

arrangements, the Government has

proposed it will only be possible to receive

an employer ETP as cash from 1 July

2007 and taxable amounts exceeding

$140,000 will be taxed at the top marginal

rate of 46.5% (including a Medicare Levy

of 1.5%). Retiring or leaving your employer

before 1 July 2007 could enable you to

rollover the payment to super, or pay less

tax on larger amounts.

The long-term benefit of rolling over to super over 20 years

Cash-out ETP Rollover ETP

$142,024

$186,836

$0

$100,000

$50,000

$150,000

$200,000

24

Contribute to super and offset CGTIf you have recently sold (or plan to sell) anasset, Capital Gains Tax (CGT) could removeup to 46.5%* of your profit. The good news isthere are a number of strategies available thatenable you to legitimately minimise your CGTliability.

If you are self-employed or under 65 andrecently retired, one approach could involvemaking a tax-deductible contribution into asuper fund. By implementing this strategy,you can save on CGT and make a larger after-tax investment.


How does the strategy work?To use this strategy, you must be able tocontribute to super (eg you must be underage 65 or, if between 65 and 70, you musthave been gainfully employed for at least40 hours over a consecutive 30 day periodduring the relevant financial year).

In addition, you must generally receive less than 10% of your assessable income (plus reportable fringe benefits) from eligible employment.

If you meet these conditions in the 2006/07financial year, you can usually claim a taxdeduction for the first $5,000 that youcontribute to super, plus 75% of the balanceup to your relevant aged-based MaximumDeductible Contribution limit (see FAQs onpage 28). The tax deduction can then be usedto offset some (or all) of your taxable capitalgain and reduce your CGT liability.

While the tax-deductible portion of your supercontribution will attract a contributions tax of15%, the net tax savings can still be quitesignificant, as the case study clearly illustrates.

Strategy#

09 The benefits• Reduce or even eliminate CGT on the sale of ordinary investments by making

tax-deductible contributions to super.

• Take advantage of a maximum tax rate of 15% on investment earnings.

25

Tips and traps• To offset your capital gain, the

tax-deductible super contribution

needs to be made in the same financial

year in which the asset is sold.

• If you use this strategy, the non

tax-deductible component of your

super contribution is treated as an

undeducted contribution (see Glossary).

Undeducted contributions do not

attract contributions tax and are

returned tax-free if withdrawn as a

cash lump sum. They also form part

of the tax-exempt deductible amount

if you use your super to purchase a

retirement income stream investment,

such as an allocated pension.

• You may want to consider contributing

more into super than the minimum

required to offset your CGT liability.

The additional tax deduction could

then be used to reduce your tax bill

if you earn income from other sources

(eg from self-employment).

• Rather than selling an asset and

transferring the after-tax proceeds into

superannuation, it may be possible to

contribute certain qualifying assets into

super in specie (see Strategy 7). While

the transfer may still result in CGT

being payable, this may be offset by

claiming a portion of the in specie

contribution as a tax deduction.

Case study

Lisa (aged 38) is self-employed and earns a taxable income of $80,000 pa. She also recentlyreceived $50,000 from the sale of some shares she owned for the last ten years – includinga capital gain of $25,000.

Assuming Lisa adopts the 50% CGT discount method when working out her taxable capitalgain (and she has no capital losses), she will need to pay $5,188 in tax on her shares at hermarginal rate 41.5%*.

Before strategy

Assessable capital gain $25,000

Less 50% CGT discount ($12,500)

Taxable capital gain $12,500

CGT payable at 41.5%* $5,188

After speaking to her financial adviser, Lisa decides to contribute $15,000 from the sale of hershares into super, entitling her to a tax deduction of $12,500# in 2006/07. By implementingthis strategy, she will be able to offset her taxable capital gain and eliminate her CGT liability of$5,188. After taking into account the tax payable on her super contribution ($1,875)^, Lisa willbe able to reduce her overall tax bill by $3,313.* Includes a Medicare Levy of 1.5%.

After strategy

Assessable capital gain $25,000

Less 50% CGT discount ($12,500)

Taxable capital gain $12,500

Less tax deduction for super contribution# ($12,500)

Net taxable gain Nil

CGT saved $5,188

Less 15% super contributions tax^ ($1,875)

Net tax saving $3,313

# The tax deduction of $12,500 is well within Lisa’s aged-based Maximum Deductible Contribution limit (see FAQs on page 28) of $42,385 in 2006/07 and is calculated as follows [$5,000 + 75% x ($15,000 –$5,000)] = $12,500.

^ A contributions tax of 15% will be payable on the tax-deductible component of Lisa’s super contribution (ie $12,500).

26

Convert business capital into tax-free retirement benefitsIf you are a small business owner, chancesare you may not have invested much in super,preferring instead to plough profits back intoyour business. This makes good sense,except for one thing – Capital Gains Tax(CGT). The more tax you pay, the less youhave for retirement.

But there is a way you can minimise yourCGT bill when you retire and use some ofyour capital to take full advantage of the supersystem. By claiming the CGT RetirementExemption, a small business owner canelect to receive a lifetime limit of up to$500,000 tax-free when disposing of activebusiness assets.

Note: Active business assets can include assets suchas land and buildings, but not passive assets suchas shares.

How does the strategy work?To use this strategy, your net income-producingassets (excluding super) must be less than$5 million in 2006/07 and your business mustbe operated as a sole trader, partnership,private company or private trust.*

When you retire, you must choose for the CGTRetirement Exemption to apply on (or before) thelodgment of your annual tax return for the yearin which you dispose of your business assets.The amount claimed via this concession is calledthe CGT Exempt component.

This component is tax-exempt when:

• Rolled over to a super or rollover fund (ie no contributions tax is payable).

• Taken as cash, provided you don’t exceedyour Reasonable Benefit Limit (RBL – seeFAQs on page 31) in the 2006/07financial year.

• Received as part of a retirement incomestream (such as an allocated pension).

However, if you are under age 55, you haveto rollover the money to take advantage of thetax concessions and won’t be able to receivea cash lump sum or commence an incomestream until you meet a condition of release(see FAQs on page 30).

* Other conditions apply. Speak to your adviser.

Strategy#

10 The benefits• Eliminate an otherwise taxable capital gain on disposal of your active business assets.

• Convert business assets into super assets.

27

Case study

Jane (aged 64) owns a business she wants to sell in order to fund her retirement. She has ownedthe business for the last ten years and has recently found a buyer who is willing to pay $700,000– providing a capital gain of $600,000. If Jane doesn’t apply for the CGT Retirement Exemption,she will need to pay $69,750 in CGT after taking into account the general 50% CGT discount*and the 50% Active Assets exemption#. As a result, she will receive a net benefit of $630,250.

Before strategy

Sale proceeds $700,000

Less cost base ($100,000)

Nominal capital gain $600,000

Less 50% CGT discount* ($300,000)

Net gain after discount $300,000

Less 50% CGT Active Assets exemption# ($150,000)

Net taxable gain $150,000

Tax payable at 46.5%^ $69,750

After-tax benefit $630,250

* Individual small business owners (eg sole traders and partners) can elect to be taxed on only 50% of thenominal gain.

# In addition, all small business owners can elect for the 50% CGT Active Assets exemption (see FAQs onpage 31) to apply.

^ Includes a Medicare Levy of 1.5%.

After strategy

If Jane applies for the CGT Retirement Exemption, she could offset her net taxable gain of$150,000 and eliminate her CGT bill of $69,750 completely. By using this strategy, she couldreceive the full sale proceeds of $700,000 without paying any tax. She could also rollover the$150,000 CGT Exempt component and invest the balance of the sale proceeds ($550,000)in super as an undeducted~ contribution in the current (2006/07) financial year.~ The Government has proposed a limit of $1million per person will apply to undeducted contributions made

between 10 May 2006 and 30 June 2007. Lower limits will apply thereafter (see FAQs on page 28).

How will the CGT Exempt component be treated after 1 July 2007?

The Government has proposed from 1 July 2007, the CGT Exempt component will form part ofthe tax-exempt component of an eligible termination payment, but the tax treatment will not change.

Tips and traps• The CGT Exempt component will count

towards your Reasonable Benefit Limit

(RBL – see FAQs on page 31) in the

2006/07 financial year. However, the

maximum CGT Exempt amount of

$500,000 is not far below the standard

lump sum RBL of $678,149. If you have

existing super benefits you should take

them into account when deciding how

much of the CGT Exempt amount

to claim.

• If you want to maximise your CGT

Retirement Exemption (up to the

maximum of $500,000), you can elect

to forgo the 50% Active Assets

exemption. This strategy is particularly

valuable if you are over age 65 and

can't make super contributions.

• There is no age limit on rolling over

a CGT Exempt component into a

super fund.

• Regardless of when the CGT Exempt

component is rolled over, the benefits

can’t be accessed until you meet a

condition of release (see FAQs on

page 30).

• When invested in super, the amount

claimed via the CGT Retirement

Exemption is classified as a rollover

and is not subject to the contribution

limits – see FAQs on page 28.

FAQs

Who can contribute to super?

Subject to the fund rules, contributions to your super accountin 2006/07 are allowed in the circumstances outlined in thetable below:

Your age Allowable contributions

< 65 • Personal contributions (both deductibleand undeducted), mandatory employercontributions, voluntary employercontributions and spouse contributions.

65–69 • Personal contributions (both deductibleand undeducted), voluntary employercontributions and spouse contributions,provided you have worked at least40 hours over a consecutive 30 dayperiod during the financial year.

• Mandatory employer contributions.

70–74 • Personal contributions (undeductedonly), provided you have worked at least40 hours over a consecutive 30 dayperiod during the financial year*.

• Mandatory employer contributions.

> 75 • Mandatory employer contributions.

* The Government has proposed from 1 July 2007, you can also makepersonal deductible contributions and receive voluntary employercontributions up to and including age 74 (provided you have worked atleast 40 hours over a consecutive 30 day period during the financial year).

An existing super benefit can be rolled over at any time.

How much can you contribute to super?

• Deductible contribution limitsThere are limits on the amount of personal and employercontributions that can be claimed as a tax deduction –see right hand column.

• Undeducted contribution limitsThe Government has proposed a limit of $1million per personwill apply to undeducted contributions made between 10 May2006 and 30 June 2007.

Note: From 1 July 2007, the Government has proposed that:

– Undeducted contributions will be subject to an annuallimit of $150,000 per person. However, if you are underage 65, you will be able to bring forward up to two yearsworth of contributions and invest up to $450,000 in oneyear. If you do this, no further contributions will beallowed in years two and three and you won’t need tomeet a work-test in any of the three years.

– Certain undeducted contributions will be excluded fromthe annual limits. These include the proceeds from thesale of small business assets up to a lifetime limit of$1million and settlements received for injuries relating topermanent disablement.

– Contributions exceeding your undeducted contributionlimit (including any excess deductible contributions – seeright-hand column), will be taxed at a penalty rate of46.5%. Where penalty tax is payable, you will be able torequest your super fund to release sufficient benefits topay the tax.

How is your super taxed?

• Tax on contributions

Personal deductible contributions and employer contributions(including salary sacrifice) form part of the super fund’sassessable income and are taxed at a maximum rate of 15%.

• Tax on investment earnings

The investment earnings of a complying super fund are taxed ata maximum rate of 15%. The tax rate payable can be reducedwith the use of dividend imputation credits and the CGTdiscount provisions. The 1/3 CGT discount means the effectivetax rate on realised capital gains is only 10%, where theinvestments have been held for more than 12 months.

What tax concessions are available whencontributing to super?

• Tax deduction on super contributions

In 2006/07, employers can claim a tax deduction oncontributions to a complying super fund up to the MaximumDeductible Contribution (MDC) limits, as follows:

Your age Maximum Deductible Contribution limit

Under 35 $15,260

35–49 $42,385

50 and over $105,113

If you are self-employed or unsupported (see Glossary), you canclaim a full deduction on the first $5,000 contributed plus 75% of thebalance up to the relevant MDC limit. To maximise your allowabledeductions, the following contributions should be made in the2006/07 financial year:

Your age Maximum contribution to claim full tax deduction

Under 35 $18,680

35–49 $54,847

50 and over $138,484

Note: The Government has proposed from 1 July 2007:

• The MDC limits will be replaced with a single Concessional DeductibleContribution (CDC) limit of $50,000 pa per person. However, if you are aged50 or over, you will be entitled to a transitional CDC limit of $100,000 pa forfive years and $50,000 pa thereafter.

• Personal deductible contributions and voluntary employer contributions(including salary sacrifice) will be deductible up to and including age 74,provided you have worked at least 40 hours over a consecutive 30 dayperiod during the financial year.

• If you are self-employed or unsupported, you will be eligible to claim a fulltax deduction up to the new CDC limits. That is, you won’t be limited toclaiming the first $5,000 plus 75% of the balance up to your relevant MDC limit.

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• Contributions exceeding the CDC limits will be taxed at a penalty rate of31.5% (in addition to the 15% contributions tax paid in the fund) and will be counted towards your undeducted contribution limit (see left-handcolumn). Where penalty tax is payable, you will be able to request your super fund to release sufficient benefits, or you can pay the tax out of non-superannuation money.

• Co-contributions for lower income employees

You may be entitled to a Government co-contribution of up to $1,500 pa if:

– Your assessable income plus reportable fringe benefitsare less than $58,000 pa.,

– At least 10% of your assessable income plus reportablefringe benefits is attributable to eligible employment*,

– You make personal after-tax (undeducted) contributionsto your super account#,

– You lodge an income tax return,

– You are under age 71 at the end of the financial year that the personal superannuation contribution is made, and

– You are not a temporary resident.

* From 1 July 2007, the Government has proposed the 10% income testwill also include business income, which may enable self-employedpeople to qualify for a co-contribution.

# Salary sacrifice amounts do not qualify as personal contributions.

The table below outlines the co-contribution you may be entitledto receive if you make personal after-tax super contributions in the2006/07 financial year.

Income^ Personal Co-contributioncontribution~ available

$28,000 Any amount Personal contribution x 1.5or less (max. $1,500)

$28,001 – $0 – $1,000 An amount equal to the $57,999 lesser of:

• Personal contributionx 1.5, or

• $1,500 – [0.05 x (income^ – $28,000)]

$28,001 – $1,000 or more $1,500 – [0.05 x$57,999 (income^– $28,000)]

$58,000 Any amount Nilor more

^ Includes assessable income plus reportable fringe benefits.

~ The personal after-tax contributions are subject to the proposedundeducted contribution limits outlined on page 28.

• Spouse contribution tax offsetYou may be able to claim a tax offset of up to $540 pa forafter-tax undeducted super contributions you make on behalfof your spouse. The amount of the offset will depend onyour spouse’s income^ as follows:

Spouse’s Contribution You can claim income^ amount† an offset of:

$10,800 $0 – $3,000 18% of contributions or less

$10,800 $3,000 or more $540 maximumor less

$10,801 – Any amount 18% of contributions $13,799 up to $3,000 (minus $1 for

every dollar your spouseearns over $10,800)

$13,800 Any amount Nilor more

^ Includes assessable income plus reportable fringe benefits.

† Your spouse will only be able to receive after-tax contributions up to theproposed undeducted contribution limits outlined on page 28.

A spouse under the relevant legislation includes a marriedor de facto spouse, but does not include a partner (marriedor de facto) who lives in a different home or a same sex de factospouse. The receiving spouse must also be under age 65 or,if between 65 and 70, must have worked at least 40 hours over30 consecutive days during the financial year.

Who can split super contributions?

To split super contributions, you and your spouse must be ina married (or de facto) relationship, but you can’t be same sexpartners. Also, to receive a contribution split, your spouse mustbe under 55 years of age or, if between 55 and 64 years, they:

• Are currently gainfully employed for 10 or more hoursper week; or

• Although not currently employed for 10 or more hours perweek, they intend to resume gainful employment for 10 or more hours per week; or

• Have never been gainfully employed for 10 or more hoursper week.

What are the current income tax rates?

• Marginal tax rates on incomeThe following table summarises the tax rates that apply to residents in the 2006/07 financial year.

Taxable income range Tax payable

$0 – $6,000 Nil

$6,001 – $25,000 15% on amount over $6,000

$25,001 – $75,000 $2,850 + 30% on amount over $25,000

$75,001 – $150,000 $17,850 + 40% on amount over $75,000

Over $150,000 $47,850 + 45% on amount over $150,000

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• Medicare LevyA levy of 1.5% that is payable on your taxable income on topof normal marginal tax rates. An additional 1% is charged forsingles with an income (including reportable fringe benefits)over $50,000 ($100,000 combined for coupes) who have noprivate health insurance. If you earn less than $16,284 pa($27,478 pa combined for couples) you are exempt fromthe levy.

When can you withdraw your super?From 1 July 1999, any new contributions to a super fund and all earnings on new and existing benefits must be preserved.This means you generally cannot access your money includingyour existing benefits, until you meet one of the following conditionsof release:

• Retirement after reaching your preservation age (55 to 60 – see below)

• Leaving your employer after age 60

• Attaining age 65

• Permanent incapacity (specific requirements apply)

• Death

• Severe financial hardship (the amount is restricted and youmust have received Commonwealth income support for sixmonths consecutively or nine months cumulatively if aged55 or over).

• Compassionate grounds (must be approved by APRA/AT0)

• Upon permanent departure from Australia for certaintemporary residents holding a specific class of visa.

• Leaving the service of your employer who has also contributedinto your super fund – restricted non-preserved benefits only.

A non-commutable income stream (see Glossary) may also becommenced with preserved benefits if you have reached yourpreservation age (see below).

Note: You can access unrestricted non-preserved benefits at any time.

What are the preservation ages?

The age at which you can withdraw your super (ie the age atwhich it’s no longer preserved) depends on when you were born.The table below shows the current preservation ages.

Date of birth Preservation age

Before 1 July 1960 55

1 July 1960 – 30 June 1961 56

1 July 1961 – 30 June 1962 57

1 July 1962 – 30 June 1963 58

1 July 1963 – 30 June 1964 59

1 July 1964 or after 60

How long can I keep my benefit in super?

Effective 10 May 2006, you can keep your benefits in theaccumulation phase of a super fund for as long as you like.

How are withdrawals taxed?

• Tax on lump sum benefitsThe following table summarises the lump sum tax rates thatapply in the 2006/07 tax year.

ETP component Tax treatment

Undeductedcontributions The full amount is tax exempt

Concessional 5% of the payment is added to the recipient's assessable income in the year of receipt and taxed accordingly

Pre-July 1983 5% of the payment is added to the recipient's assessable income in the year of receipt and taxed accordingly

Post-June 1983 Up to age 55 – 21.5%*(taxed element) From age 55 – up to $135,590^ 0%

– over $135,590^ 16.5%*

Post-June 1983 Up to age 55 – 31.5%*(untaxed element) From age 55 – up to $135,590^ 16.5%*

– over $135,590^ 31.5%*

Post 30 June 1994 invalidity The full amount is tax exempt

Excessive Post-June 1983 (taxed element) (ie amounts – taxed at 39.5%*above your RBL) Balance of excessive components

– taxed at 46.5%*

CGT Exempt The full amount is tax exempt


^ This figure applies in 2006/07.

Note: The Government has proposed from 1 July 2007:

• RBLs will be abolished.• The existing ETP components will be replaced with two – tax-exempt

and taxable.• Where you have a tax-exempt and taxable component, each lump sum

withdrawal will contain a proportional amount of each component.• Regardless of the components that make up your benefit, no tax will be

payable on lump sum withdrawals from a taxed super fund (see Glossary) atage 60 or over.

• If under age 60, the taxable component will be taxed in a similar manner tothe current post-June 1983 (taxed element). The difference is the tax-freethreshold between age 55 and 59 will be $140,000 in 2007/08 and willincrease periodically in increments of $5,000.

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• Reasonable Benefit Limits (RBLs)RBLs are the maximum amount of concessionally taxedsuperannuation and employer ETP benefits you can receiveover your lifetime. Any amount you withdraw above your RBL(ie an excessive component) will be taxed at up to 46.5%.The following table summarises these limits for the 2006/07tax year.

Note: The Government has proposed RBLs will be abolished from 1 July 2007.

Limit Under what circumstances?

Lump Sum If you take your assessable benefits RBL $678,149* as a cash lump sum, or you use these

amounts to purchase an allocated pension or immediate annuity.

Pension RBL If you take at least 50% of your $1,356,291* assessable benefits or 50% of your

pension RBL (whichever is less) in theform of a complying income stream (see Glossary).

* Some people may be eligible for higher transitional RBLs.

When a benefit is assessed against the lump sum RBL and theperson is less than age 55, the lump sum RBL is discounted by2.5% for each whole year between the person’s current age andtheir 55th birthday. The Pension RBL is not discounted.

The following table sets out the RBL amount for each componentin the 2006/07 tax year.

Component % counted for RBLs

Undeducted contributions Not counted

Pre-July 1983 – Super ETP 100%

Pre-July 1983 – Employer ETP Not counted#

Post-June 1983 taxed element 100%

Post-June 1983 untaxed element 85% counted

Concessional Not counted

Post-30 June 1994 invalidity Not counted

Non-qualifying Not counted

CGT exempt 100%

# If the employee is an associate of the employer (eg a director or apartner), 100% of the pre-July 1983 component will count towards their RBL.

What CGT concessions are available to smallbusiness owners?

Small business owners have a number of CGT concessionsavailable to them. Some can also take advantage of more thanone CGT concession.

To qualify for these concessions, small business owners musthave net assets of less than $5 million in 2006/07 and theassets disposed of must be active assets (eg land, buildings and goodwill).

In addition, the following specific criteria must be met:

• 15 year CGT exemption – This is a 100% CGT exemptionavailable to all small business owners on the disposal ofactive assets held for 15 years. The assets must have beendisposed of for the purpose of retirement, and the smallbusiness owner must be at least 55 years of age orincapacitated.

• 50% CGT Discount – This is a 50% CGT exemption on allassets held for more than 12 months and is only available to individuals and trusts. The exemption must be usedbefore any other concession is claimed.

• 50% CGT Active Assets exemption – This is a further50% exemption available to all small business ownerson the disposal of active assets.

• CGT Retirement exemption – This is available to all smallbusiness owners up to a maximum lifetime limit of $500,000.If the small business owner is less than 55 years of age, theymust roll over the proceeds into a super fund. However, if thesmall business owner is over 55, they can take the proceeds ascash, roll over the funds to super or purchase an income stream.

Note: Other conditions may apply to the above concessions. Speak to yourfinancial adviser.

What are the benefits of purchasing an incomestream with superannuation money?

Rolling over your super to purchase an income stream can providebenefits which aren’t available if you take your superannuationas a lump sum in the 2006/07 tax year. These include:

• Avoiding lump sum tax

• Investment earnings of the income stream accumulate tax-free

• A possible 15% offset on your taxable income payments (this means it’s possible to receive up to $36,788 tax freeeach year for singles and $66,266 for couples combined)^

• You may receive favourable social security treatment whichcould make you eligible to receive the Age Pension andassociated benefits.

For further information on the benefits of investing in retirementincome streams, see our brochure, Retire in Style.^ The Government has proposed that from 1 July 2007, no tax will be

payable at age 60 or over on lump sum withdrawals or income streaminvestments paid from a taxed super fund (see Glossary).

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Glossary

Allocated pension – An account in which you invest your super savingsin exchange for a regular and flexible income.

Annuity – A policy in which you invest super or non-super savingsin exchange for a regular predetermined income that is guaranteed foran agreed period of time.

Assessable income – Income (including capital gains) you receivebefore deductions.

After-tax benefit – Your super or income stream benefit after any lumpsum tax is deducted.

Business real property – Any freehold or leasehold interest of a person inreal property which is used wholly and exclusively in the person’s business.

Capital gains tax (CGT) – A tax on the growth in the value of assets orinvestments, payable when the gain is realised. If the assets have been heldby an individual, trust or super fund for more than one year, the capital gainreceives concessional treatment.

Complying income stream – A special type of income stream that mustmeet a number of criteria to enable you to obtain a 50% Assets Testexemption or qualify for the Pension RBL.

Complying super fund – A super fund that qualifies for concessionaltax rates. A complying super fund must meet the requirements that areset down by law.

Condition of release – Circumstance upon which you can withdraw yoursuper benefits (See FAQs on page 30).

Contributions tax – A tax of 15% applied to personal deductible and employercontributions made to a super fund.

Deductible amount – The portion of your income stream that is not assessedfor income tax purposes. This is calculated by dividing the ‘UndeductedPurchase Price’ by your life expectancy (or fixed term of your annuity orpension where applicable).

Discretionary master trust – A type of super fund that offers similarinvestment flexibility to a self-managed fund without the burden of havingto be a Trustee.

Disposal of asset – When an asset changes ownership, which can includemeans other than through sale (eg by gift). Relates to Capital Gains Tax.

Eligible Termination Payment (ETP) – A lump sum super benefit or apayment made by an employer on termination of employment (eg goldenhandshake). For tax purposes, ETPs are split into various components, eachof which is taxed differently.

Excessive component – That part of an Eligible Termination Payment orincome stream that exceeds an individual’s Reasonable Benefit Limit.

Ex-gratia payment – A payment, usually made in the form of a lump sum,which does not form part of an employee’s normal wages or salary.

Fringe benefit – A benefit provided by your employer in respect ofemployment. Super contributions made by an employer to a complyingsuper fund are excluded from Fringe Benefits Tax.

Fringe Benefits Tax (FBT) – A tax payable by your employer on the taxablevalue of certain fringe benefits that you receive as an employee. The currentrate of tax is 46.5%.

Gainfully employed – When you are engaged in an occupation in whichyou earn an income. If your sole source of income is through investments,you are not gainfully employed.

Income streams – Investments that provide a regular income, such asallocated pensions and annuities.

In specie contribution – The contribution of an asset into super ratherthan cash. It is achieved by transferring ownership of the asset to the superfund. Only certain types of assets can be transferred.

Life expectancy – As determined by reference to the current Australian Life Tables.

Lump sum tax – The tax that may be payable when you take superannuationor an employer ETP as a cash lump sum.

Mandatory employer contributions – Super contributions your employeris required to make on your behalf by law. Includes SuperannuationGuarantee (SG) contributions and employer contributions required underan industrial award or certified agreement.

Marginal tax rate – The stepped rate of tax you pay on your taxableincome. See FAQs on page 29.

Non-commutable income stream – An income stream that can bepurchased with preserved benefits after reaching your preservation age(see FAQs on page 30), but generally cannot be cashed out until you meetanother condition of release (see FAQs on page 30).

Ordinary money – Money invested outside of super.

Pension offset – A tax offset of up to 15% of the taxable income paymentsreceived from a super pension or ETP annuity.

Personal super – A super fund that is not sponsored by your employer,although your employer may be able to contribute to it.

Post-June 1983 component – Part of your ETP that relates to employmentservice or fund membership after 30 June 1983.

Post-30 June 1994 Invalidity component – Part of your ETP that relatesto future service lost through invalidity.

Pre-July 1983 component – Part of your ETP that relates to employmentservice or fund membership before 1 July 1983.

Preserved benefits – Benefits that must be kept in a super fund and cannotbe withdrawn until you meet a condition of release (see FAQs on page 30).

Purchase price – The lump sum or contributions used to buy an income stream.

Reasonable Benefit Limit (RBL) – The maximum amount of concessionallytaxed super and employer ETP benefits you can receive in your lifetime (seeFAQs on page 31).

Restricted non-preserved benefits – Non-preserved benefits that can onlybe withdrawn from the super system when you meet a condition of release(such as when you leave your employer who has made contributions to yoursuper fund on your behalf).

Rollover – When you move your super benefits directly to a superor rollover fund.

Tax deduction – An amount that is deducted from your assessable incomebefore tax is calculated.

Taxed super fund – A super fund that pays tax on contributions andearnings in accordance with the standard super tax provisions.

Tax offset – An amount deducted off the actual tax you have to pay.You may be able to claim a tax offset in your end of year tax return (eg franking credits). Sometimes a tax offset may be taken into account in calculating your PAYG rates.

Undeducted contributions – Amounts you contribute to a super fund after30 June 1983 and have not claimed as a tax deduction.

Undeducted Purchase Price (UPP) – The total of your undeductedcontributions, CGT Exempt component and post-30 June 1994 Invaliditycomponent when used to purchase an income stream.

Unrestricted non-preserved benefits – Benefits that have met a conditionof release and therefore can be withdrawn from a super fund at any time.

Unsupported – A person who is not eligible to receive superannuation froman employer.

Voluntary employer contributions – Include salary sacrifice contributions andcontributions made by an employer that are discretionary (ie not mandatory).

Speak to your financial adviser about these solutions to grow your super and protect your assets.For the latest Product Disclosure Statement, visit mlc.com.au or speak with your financial adviser.

Strategies 1, 2, 3, 4, 5, 8, 9, 10 Strategy 6 Strategy 7

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MLC MasterKey Service CentreFor more information call MLC MasterKey

from anywhere in Australia on 132 652,or contact your adviser.

mlc.com.au

MLC LimitedPO Box 200

North SydneyNSW 2059

MLC also has guides on wealth creation, wealth protection, debt management and retirement.Ask your financial adviser for more details.

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